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The effect of environmental sustainability on credit risk

Author

Listed:
  • André Höck

    (University of Kassel
    EB – Sustainable Investment Management GmbH)

  • Christian Klein

    (University of Kassel)

  • Alexander Landau

    (University of Kassel
    Prof. Dr. Ludewig + Sozien)

  • Bernhard Zwergel

    (University of Kassel)

Abstract

The European Commission has proposed establishing a framework that redirects capital to sustainable investments in order to foster sustainable economic growth. A key proposal from this framework is the mandatory consideration of environmental criteria for investment decisions. However, in particular for bond investors, there is not much academic guidance on how to integrate sustainability criteria in the investment process. Hence, this study investigates the impact of environmental sustainability on the pricing of credit risk for European corporations. Furthermore, whether or not the credit worthiness of a corporation has a moderating effect on the relationship between the environmental sustainability and the credit risk premium is analyzed. The findings prove that more sustainable companies have lower credit risk premiums if they also have a high credit worthiness.

Suggested Citation

  • André Höck & Christian Klein & Alexander Landau & Bernhard Zwergel, 2020. "The effect of environmental sustainability on credit risk," Journal of Asset Management, Palgrave Macmillan, vol. 21(2), pages 85-93, March.
    • Handle: RePEc:pal:assmgt:v:21:y:2020:i:2:d:10.1057_s41260-020-00155-4
    DOI: 10.1057/s41260-020-00155-4
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    References listed on IDEAS

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    2. Dumrose, Maurice & Höck, André, 2023. "Corporate Carbon-Risk and Credit-Risk: The Impact of Carbon-Risk Exposure and Management on Credit Spreads in Different Regulatory Environments," Finance Research Letters, Elsevier, vol. 51(C).
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    5. Champagne, Claudia & Coggins, Frank & Sodjahin, Amos, 2022. "Can extra-financial ratings serve as an indicator of ESG risk?," Global Finance Journal, Elsevier, vol. 54(C).
    6. Meles, Antonio & Salerno, Dario & Sampagnaro, Gabriele & Verdoliva, Vincenzo & Zhang, Jianing, 2023. "The influence of green innovation on default risk: Evidence from Europe," International Review of Economics & Finance, Elsevier, vol. 84(C), pages 692-710.
    7. Kabir, Md Nurul & Rahman, Sohanur & Rahman, Md Arifur & Anwar, Mumtaheena, 2021. "Carbon emissions and default risk: International evidence from firm-level data," Economic Modelling, Elsevier, vol. 103(C).
    8. Pranith Kumar Roy & Krishnendu Shaw, 2022. "Developing a multi-criteria sustainable credit score system using fuzzy BWM and fuzzy TOPSIS," Environment, Development and Sustainability: A Multidisciplinary Approach to the Theory and Practice of Sustainable Development, Springer, vol. 24(4), pages 5368-5399, April.
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    10. Alessandra Ortolano & Eugenia Nissi, 2022. "The Volatility of the “Green” Option-Adjusted Spread: Evidence before and during the Pandemic Period," Risks, MDPI, vol. 10(3), pages 1-13, February.

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    More about this item

    Keywords

    Sustainability; Environment; Default risk measurement; CDS spreads;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • M14 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Corporate Culture; Diversity; Social Responsibility
    • Q51 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Valuation of Environmental Effects

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